Boost Your Credit Score to Buy a Home

Boost Your Credit Score to Buy a Home

Promises of loans for bad credit borrowers, while common amid the housing boom in the early 2000s, are now rare. If you’re interested in buying a home today, know that lenders will carefully check your credit and will rarely approve a loan for someone with seriously bad credit.

For that reason, it’s important to check your credit report and your credit score. Many consumers are surprised (pleasantly or unpleasantly) by their credit score and many find errors on their credit reports. Carefully review your credit report and focus in particular on negative items to see if there are ways you can address them and improve your credit profile and your access to a mortgage.

Credit Scores and Lenders

A lender can be a great source of advice about your particular credit issues and can tell you what minimum credit score is needed for a particular loan program. Different lenders have different loan standards, so while one lender may reject you if you have a credit score of 640, another could give you a loan approval.

In general, FHA-insured loans have lower credit score requirements than conventional loans. In addition, the FHA has loan programs that make it easier for some people who lost a home in a short sale or a foreclosure to get a new mortgage faster. While FHA loans can be easier to qualify for if you have damaged credit, the downside of this loan program is that you must pay mortgage insurance on the loan, usually for the life of the loan. FHA mortgage insurance is typically higher than private mortgage insurance that you must pay for conventional loans if you make a down payment of less than 20 percent. Private mortgage insurance is automatically cancelled when your loan-to-value ratio reaches 78 percent.

Conventional lenders base their interest rates on your credit score, among other factors, so if your credit score is above 740 you’ll pay a slightly lower interest rate than someone with a credit score of 700.

Lenders look at many factors when evaluating you for a mortgage loan, including your debt-to-income ratio, your income and assets, how much your down payment will be and your job history. These compensating factors can sometimes help you overcome a slightly low credit score, but your best chance for a loan approval is to improve your credit score.

Boost Your Credit Score

While there’s no quick fix for bad credit, taking steps to improve your credit profile can raise your score over time:

§   If you have any collections or judgments against you, pay them off as quickly as possible.

§  Bring your over-the-limit and past-due accounts up-to-date.

§  Pay all bills on time.

§  Try to reduce your credit card debt to 25 percent or less of your credit line on each card.

§  Don’t open new lines of credit.

§  Don’t close your credit card accounts because then you’ll be using more of your overall credit limit.

§  If you have an old credit card that you haven’t used in awhile, you can use it and then pay the bill in full to show that you can responsibly handle credit.

A reputable lender can suggest specific actions such as which credit card bill to pay off if you can’t eliminate your debt, so it would be a wise move to visit a lender as soon as you’re considering buying a home.

How To Get The Best Mortgage For You

How To Get The Best Mortgage For You

You and your mortgage might be together for years, so you will want to get the best one around. Finding your perfect match takes more than just choosing the one with the lowest interest rate. There are other factors — and fees — to consider. Before you sign on the dotted line, make sure you know what to look for.

Loan Types

A variety of mortgages are available on the market, but two types are the most common: fixed-rate and adjustable-rate. A fixed-rate mortgage has the same interest rate through the life of the loan. Fixed-rate mortgages eliminate surprises, which is good if interest rates rise; but if interest rates fall, you’ll be stuck with the same interest payment.

An adjustable rate mortgage typically starts with a lower short-term interest rate. After the initial period ends, your rate will fluctuate throughout the rest of the loan. An adjustable-rate mortgage can be a gamble. If interest rates are low, you’ll pay less, but if interest rates rise, you could end up paying more each month.

While 30-year mortgages are the most common, you have the option of considering mortgages with shorter pay-back periods of 10, 15 or 20 years, among others. You’ll pay much less interest over the life of these shorter-term loans, but your monthly payments will be higher than with a 30-year mortgage. There may be tax advantages to a 30-year mortgage as well. You could also choose a 30-year loan and, if you’re disciplined, pay it off early. Making this decision depends a lot on where you are in your life, and how you want to manage your investments. (For more, see Do You Need a 30-Year Mortgage?)

Lenders

When looking for a lender, don’t settle on the first company to offer you a mortgage. Interest rates and fees can vary widely between lenders, and you’ll need to comparison shop to make sure you’re getting the best deal. To simplify the process, use an online tool such as realtor.com®’s  Get a Mortgage Quote to see offers from dozens of lenders.

Interest Rates

Interest rates vary depending on current market conditions, economic factors and your own background. Generally, if you have a steady job and a high credit score, you’ll qualify for the best rates, but if you have a few blemishes on your credit report, you’re considered to be a higher risk and may only qualify for a higher interest rate. Different lenders may also offer you different interest rates.

To get an idea of how different interest rates will affect your loan amount and monthly payment, try the Loan Comparison by Rate calculator.

Fees

Interest isn’t the only extra you’ll pay with a mortgage. Many lenders also tack on additional fees. Often known as junk fees, these include charges for things such as loan processing or loan administration. You may not be able to get around these fees entirely, but you can save yourself money by comparing the fees across several lenders.

Private Mortgage Insurance

When you buy a house the amount you put down is considered the equity (or stake) you have in the house. If you do not have a large down payment, you won’t have much equity in the house, which lenders consider a higher risk. To protect themselves in case you default on the loan, most lenders require that you pay an additional fee known as private mortgage insurance.

PMI can add several thousand dollars to the cost of your loan. To avoid it, you’ll need to put at least 20 percent down. If you have to pay PMI, discuss the total cost and payments with your lender. PMI varies depending on your loan size and terms, so you may save money with a different loan.

Lock Periods

Finally, keep in mind that offers from lenders have a time limit, known as the lock period. During this time, the interest rate is locked in. However, if you go past the lock period, your interest rate could be higher or lower depending on current forecasts. To keep from losing your preferred interest rate, you’ll have to close within the lock period

How Soon Can We Buy After a Short Sale

How Soon Can We Buy After a Short Sale

QUESTION: We had to do a short sale on our home in Nevada last year, but now we have landed on our feet again and want to buy a home in our new location in Oregon. We have enough money saved up for a 20 percent down payment for a house we can afford. Is it possible for us to qualify for a mortgage?

ANSWER: It’s great that you landed on your feet and have been able to save money for a down payment on a new house. Your bigger down payment can be a compensating factor that some lenders will use to qualify you for a loan in spite of a negative credit profile that’s a likely result of the short sale.

Conventional loan guidelines established by Fannie Mae and Freddie Mac say that you must wait two years after the closing date on your short sale to finance another home, if you have 20 percent for a down payment. You would have to wait longer if you had less cash for a down payment (four years with 10 percent and seven years with less than 10 percent). So if you want a conventional loan, you’ll need to wait another year.

FHA-insured loans are available with a down payment of as little as 3.5 percent after a three-year waiting period. Veterans Administration loans, which don’t require a down payment at all, are available after a two-year waiting period.

However, the FHA recently introduced a “Back to Work – Extenuating Circumstances” program to help the many people who lost their homes during the recent housing crisis and recession. You may qualify now for this program if you lost your home due to a job loss or a drop in income or both. This temporary loan program will be available for FHA loans issued between Aug.t 15, 2013, and Sept. 30, 2016.

To qualify, you’ll have to meet standard FHA guidelines for a loan approval and a mortgage lender’s requirements. Typically, this means that your credit score must be 620 or 640 and above and your debt-to-income ratio must be 41 percent to 43 percent or less.  You’ll be required to fully document your job history, income and assets.

In addition, the Back to Work program has other specific requirements. You must:

§  Participate in an FHA-approved housing counseling program.

§  Provide documentation for the “economic event” that caused the bankruptcy, which must have reduced your income by 20 percent or more for at least six months. In other words, you’ll need a W2 or tax returns or a termination letter.

§  Prove that you had good credit before the economic event damaged it.

§  Prove that you’ve fully recovered from the event by having a credit report without any late payments for at least 12 months on installment debt and without any major derogatory comments on revolving credit accounts. Your report cannot show any judgments or collections unless they’re related to medical bills or identity theft.

Consult a mortgage lender to see if you can qualify for this FHA program, but remember that FHA loans require mortgage insurance for at least 11 years, even if you make a down payment of 20 percent. You may want to consider asking a mortgage lender if any exceptions are possible for individuals who want to apply for a conventional loan after a short sale. If not, you should weigh the benefit of waiting one more year to buy a home rather than committing to years of mortgage insurance payments.

What Are The Tax Implications Of Selling A House

What Are The Tax Implications Of Selling A House

Selling your home can be an exciting and challenging experience, particularly if you’re attempting to simultaneous settle on one house and purchase another.

The numbers spinning through your head at this point include principal and interest payments, closing costs, down payment funds and moving costs. Unless you happen to be making this move right around April 15, when federal income taxes are on everyone’s mind, you may not have given much thought to taxes on the sale of your home. In most cases, that’s OK, because for the vast majority of people no taxes are due on a home sale.

Taxes and Home Sellers

Federal tax law allows home sellers a tax exclusion on the capital gains from the sale as long as they meet certain criteria, the most important of which is that the home must be the primary residence for at least two of the previous five years. Single taxpayers can exclude a profit of up to $250,000, and married taxpayers who file joint returns can exclude a profit of up to $500,000.  You can use this exclusion more than once in your lifetime as long as you haven’t taken the exclusion within the past two years for another house.

The Internal Revenue Service spells out certain circumstances in which you can take the exclusion on your profit, even if you don’t meet the two-year requirement. If you couldn’t live in the house because you’re divorced or your spouse died, or if you were deployed overseas by the military or by the U.S. Foreign Service, you may still be able to qualify for the full exclusion.

A partial exclusion may be possible if you sold your house before two years of residency due to a job loss or transfer, illness or because of other unforeseen circumstances, such as a divorce or multiple births from a single pregnancy.

Consult with a tax professional to determine your eligibility for the exclusion.

Calculating Your Tax Bill

If you’re certain that you’re not required to pay taxes on the sale of your home because you meet the exclusion eligibility requirements, then you aren’t required to report the sale of your home on your federal tax return.

If you do have to pay taxes, you and your tax professional will need to calculate the adjusted basis of the house. The adjusted basis is the original price of your home, plus capital improvements, minus any depreciation. Capital improvements mean things like adding a deck or finishing a basement or remodeling your kitchen, not routine maintenance. Depreciation refers to tax credits you took such as for a home office, a first-time home buyer tax credit, or a credit for energy-efficient improvements.

Your taxes will be based on the calculation of the sales price of the home, minus deductible closing costs, minus your basis. Some examples of deductible closing costs include the real estate broker’s commission, title insurance, legal fees, administrative costs and any inspection fees paid by you instead of the buyer. If you made any home improvements specifically in order to sell your home, such as new landscaping or repairs or replacing the carpet in some rooms, you can deduct those costs — as long as you did them within 90 days before the sale.

You may also be able to deduct moving costs from your tax bill if you’re moving at least 50 miles because of a job change.

While these are potential tax implications of selling your home, you should always consult a tax professional to make sure you are meeting current IRS requirements.

How Much Mortgage Can I Afford

How Much Mortgage Can I Afford

When you buy a home, the amount you can spend depends on how much you have in cash to use for a down payment and how much you can borrow. A mortgage lender can prequalify you for a loan, which essentially means the lender will ask you a few questions about your income, credit profile and debt, and give you an estimate of what you can borrow based on those facts.

However, before you begin looking for a home, you should get a full preapproval from a lender based on verification of your credit and income, because that will give you a more accurate idea of how much you can borrow.

Find Your Own Comfortable Payment

Before you meet with a lender, though, it’s a good idea to evaluate your personal financial situation and come up with a monthly payment range that you can comfortably afford. The reason it’s important to do this on your own is that you may have expenses or financial goals to meet that the lender won’t take into consideration when approving you for a loan. For example, if your greatest pleasure is to play golf several times per month or to ski; or if you’re actively saving money to start a family and hope to have one spouse reduce work hours when that happens, your housing budget should take those factors into account.

You can use your current comfort level with your rent payment and look at your monthly income and expenses to estimate your own ideal mortgage payment. Don’t forget that when you become a homeowner your housing payment will include principal and interest, property taxes and homeowners’ insurance. If your down payment is less than 20 percent, you’ll need to pay mortgage insurance and you should budget at least 1 percent of the home price for maintenance and repairs. In addition, you may need to pay homeowner association or condominium association dues.

Mortgage Loan Qualifications

Lenders have different guidelines that they follow. Most will only allow a maximum debt-to-income ratio of 41 percent to 43 percent. To calculate your ratio, determine your gross monthly income including all income that can be documented through paystubs or your tax return. Your monthly debt payments will include your new housing payment and the minimum monthly payment on all your outstanding debt, such as a credit card, a student loan, a car loan, alimony, child support or a personal loan.

You can use a mortgage calculator to help you with your estimation.

In order to qualify you for a loan and determine your interest rate, a lender will look at a variety of factors, including your income, assets, down payment, credit score, debts and job history. The higher your credit score, the lower your interest rate will be for conventional loans, which in turn means your payment will be lower.

Mortgage Loan Options

Remember that the actual size of your mortgage payment will depend on your loan term and interest rate. In general, a longer loan term will have lower payments, but it will usually have a higher interest rate and you’ll pay more in interest over time because of the term. While it’s important for you to get an idea of your own comfort level with a loan payment, a good lender can evaluate your individual circumstances and make recommendations for a loan program that can meet your financial needs. A good lender can also give you advice that can help you position yourself for a smart home purchase, such as ways to improve your credit or to build up the size of your down payment so you can take out a smaller loan and become a homeowner.

The Earnest Money Deposit – What You Should Know

The Earnest Money Deposit – What You Should Know

The earnest money deposit is an important part of the home buying process. It tells the seller you’re a committed buyer and it helps fund your down payment.

Without earnest money, you could make offers on many homes, essentially taking them off the market until you decided which one you liked best. Sellers rarely accept offers without deposits.

Assuming that all goes well and your offer is accepted by the seller, the earnest money will go toward the down payment and closing costs. In many circumstances, you can get most of your deposit back if you discover something that you don’t like about the home.

How Much Should You Put Down in the Earnest Money Deposit?

The amount you’ll pay for the earnest money deposit will depend on a few factors, such as policies and limitations in your state, the current real estate market, and what the seller requires. On average, however, you can expect to hand over 1 to 2 percent of the total purchase price as earnest money.

In some real estate markets you may end up putting down more or less than the average amount. In a real estate market where homes aren’t selling quickly, the seller may only require 1 percent or less for the earnest money deposit. In markets where demand is high, the seller may ask for a higher deposit, perhaps as much as 2 or 3 percent. You can sometimes win a bid if you give the seller a large deposit. In fact, the seller may be willing to come down in price a little if you make a bigger deposit.

However, you may wind up having to do some paperwork for your mortgage lender, and the bank may want to verify the source of the funds for larger deposits. It won’t be a problem if you can show that you’ve had the money for at least 60 days.

When Do You Pay the Earnest Money, and Who Holds It?

In most cases, after your offer is accepted and you sign the purchase agreement, you give your earnest money deposit to the title company. In some states, the real estate broker holds the deposit.

Always check the credentials of the firm or broker taking the deposit and verify that the funds will be held in escrow. Never give the earnest money to the seller; it could be difficult or impossible to get it back if something goes wrong.

After turning over the deposit, the funds are held in an escrow account until the home sale is in the final stages. Once everything is ready, the funds are released from escrow and applied to your down payment.

Can You Get Your Earnest Money Back?

If the deal falls through, a small cancellation fee is usually taken out of the deposit, but the remainder remains in escrow. Whoever holds the deposit determines whether you should get the money back under the terms of the purchase agreement. Make sure that the purchase agreement covers how a refund is handled.

To be on the safe side, make sure the purchase agreement covers how a refund would be handled. Keep in mind that even if you are pre-approved for a mortgage loan, you can be declined when you apply for one. In such cases, standard contracts allow you to recover your earnest money deposit. You can also usually get your money back if you find problems with the property.

Updated from an earlier version by Laura Sherman.

Odd Moving Tips That Really Work

Odd Moving Tips That Really Work

You’ve got the basics — cardboard boxes, newspaper, the phone number of a pizza place so you can feed the friends helping you move all your worldly goods. But do you have enough socks for the stemware?

As with any major home project, there’s always someone out there with more experience and a host of clever ideas. Moving is no different. We’ve rounded up a list of some of our favorite quirky-but-useful tips to make trading one roof for another go a little bit smoother.

1. Footwear, Meet Stemware

About those socks and glasses . . . If you can double up and use some of your belongings to protect others, you cut down on space and moving supplies. Socks slipped around the wine glasses can help pad the delicate stems.

2. Plates on Plates

Instead of painstakingly wrapping each dinner dish in newsprint or bubble wrap, or purchasing those pre-packaged dishpacks, buy one cheap bag of Styrofoam plates. Alternate stacking the real plates with the disposables and — voila! — instant padding. Genius, right?

3. Make Like a Ghost

Worn sheets can be used as an extra layer of protection around your mattress, or any piece of furniture. You may not want to use that extra-fancy satin set, but old, cheap stand-bys can take a stain or risk a tear better than a mattress or sofa upholstery. Bonus: Like the socks, using sheets as packing material frees up more box space.

4. Pack in Color

Sure, you can painstakingly label every box. Or, just slap on some color. Buy color dots or several hues of duct tape, designate a specific color for each room, and stick the appropriate dot or tape on each box. The best part, we think, is the idea of making a legend that can keep track of all of your colors. That way, you won’t mistake the red for the den instead of the kitchen, and unpacking becomes a snap.

5. Use Your Wheels

Have wheelie bags? Use them for heavy things like books, especially if it’s a relatively smaller suitcase and not an Army-size duffel. You won’t be able to get away without ever having to lift the bag, such as in and out of a vehicle, but at least you’ll have a little extra help.

6. Bag Your Clothes

This tip may not work for every move, since some moving companies won’t touch any goods not packed in boxes. However, if such restrictions don’t pertain to you, break out the garbage bags. Pull one bag up around a cluster of your hanging clothes, and tie the open end by the hangers. One blogger bragged that she packed her entire closet in 15 minutes this way.

7. Take Pictures

The serving dishes fit in the dozen breakfront shelves like puzzle pieces now, but such a tight fit may be hard to replicate after everything has been removed to boxes. Pictures can act as an unpacking guide. Photos also protect your goods for insurance purposes — you’ll have proof should anything break or chip in transit.

8. Don’t Just Ditch the Fish

Some people might flush their goldfish, but some tanks are worth serious money and heart. Tanks contain their own ecosystems, including bacteria. Put the fish in a separate container, but keep some of the water the fish are accustomed to so you retain the original bacteria colony when you establish their new home in your new home.

9. Leave the Garage Empty

In the new digs, resist the temptation to pile boxes into the garage, or attic, or back closet, with a promise to get to them later. “Later” can last months. If a boxful of stuff is so unnecessary that a year could pass without needing the contents, maybe that’s a tip to ditch the contents before the move. Otherwise, you risk forgetting where you put important things, or end up parking the car outside all winter.

10. Unpack the TV Last

The desire to relax is strong. The coffee table pushed up against the sofa looks so inviting, but those boxes aren’t going to unpack themselves. Resist the urge to derail your momentum. Otherwise, those boxes will just stand over your head. Unpack the TV last, sink deeply into that comfy couch, and revel in the knowledge of a well-done moving job any pro would envy.

Be Prepared to Buy Insurance When Buying a Home

Be Prepared to Buy Insurance When Buying a Home

No one would drive a car without insurance, so it figures that no homeowner should be without insurance.

The essential idea behind various forms of real estate insurance is to protect owners in the event of catastrophe. If something goes wrong, insurance can be the bargain of a lifetime.

What Kind and How Much?

There are various forms of insurance associated with home ownership, including these major types:

§  Title Insurance: Purchased with a one-time fee at closing, title insurance protects owners in the event that the title to the property is found to be invalid. Coverage includes “lenders” policies, which protect buyers up to the mortgage value of the property; and “owners” coverage, which protects owners up to the purchase price. In other words, owners coverage protects both the mortgage amount and the value of the down payment.

§  Homeowners insurance: Provides fire, theft and liability coverage. Homeowners policies are required by lenders and often cover a surprising number of items, including in some cases such property as wedding rings, furniture and home office equipment.

§  Flood insurance: Generally required in high-risk, flood-prone areas, this insurance is issued by the federal government and provides as much as $250,000 in coverage for a single-family home, plus $100,000 for contents. Local REALTORS® can explain which locations require such coverage.

§  Home warranties: With new homes, buyers want assurance that if something goes wrong after completion, the builder will be there to make repairs. But what if the builder refuses to do the work or goes out of business? Home warranties bought from third parties by home builders are generally designed to provide several forms of protection: workmanship for the first year, mechanical problems such as plumbing and wiring for the first two years, and structural defects for up to 10 years. Home warranties for existing homes are typically one-year service agreements purchased by sellers. In the event of a covered defect or breakdown, the warranty firm will step in and make the repair or cover its cost. Insurance policies and warranties have limitations and individual programs have different levels of coverage, deductibles and costs. For details, speak with REALTORS®, insurance brokers and home builders.

When Do You Get Insurance?

The time to obtain insurance and warranty coverage is at closing, so speak with a REALTOR® or insurance broker prior to closing. Be sure to ask about limitations, costs, deductibles and “endorsements” (additional forms of coverage that may be available).